The Development of Economics

CHAPTER XI

JOHN STUART MILL

John Stuart Mill occupies a unique place in the development of the Classical Political Economy of England. His work marked the end of one period and the beginning of another, and his familiarity with political science, history, and philosophy gave him a breadth of view and a capacity to see the connection between theory and practice possessed by no other member of the school except Adam Smith. He described in the following words the goal he placed before himself in writing his treatise on political economy:

“It appears to the present writer, that a work similar in its object and general conception to that of Adam Smith, but adapted to the more extended knowledge and improved ideas of the present age, is the kind of contribution which Political Economy at present requires. The Wealth of Nations is in many parts obsolete, and in all, imperfect. Political Economy, properly so-called, has grown up almost from infancy since the time of Adam Smith; and the philosophy of society, from which practically that eminent thinker never separated his more peculiar theme, though still in a very early stage of its progress, has advanced many steps beyond the point at which he left it. No attempt, however, has yet been made to combine his practical mode of treating his subject with the increased knowledge since acquired of its theory, or to exhibit the economical phenomena of society in the relation in which they stand to the best social ideas of the present time, as he did, with such admirable success, in reference to the philosophy of his century.”

“Such is the idea which the writer of the present work has kept before him.”

These words were published in 1848 in the preface to the first edition of his Principles of Political Economy with Some of Their Applications to Social Philosophy. The degree of success he achieved in the performance of this task will appear in the course of this chapter. It is sufficient at this point to say that it was such as to give his treatise the distinction of making the end of one epoch in the development of the science and the beginning of another. His Principles was preeminently a transitional work summing up and expounding what had been done before and opening the way for the new developments of the future. We shall first attempt to describe Mill’s preparation and qualifications for the task he undertook.

A. Mill’s Preparation and Qualifications for His Work

He was the son of James Mill, who during the greater part of his life was a valued and trusted servant and the historian of the East India Company, and an economist of some distinction. During the first seventeen years of his life (1806-1823), John Stuart, who was a very precocious youth and unusually equipped by nature with intellectual capacity and the qualities essential to the development of excellence and strength of character, was put by his father through a course of study and training which made him a very keen and efficient thinker, familiarized him with the existing state of the most important branches of knowledge and with the political and social movements of his time, and created in him the desire and the decision to devote his life to the advancement of knowledge and the improvement of social conditions.

In 1823 he entered India House as a junior clerk, and he remained in the service of the East India Company until its dissolution in 1857. While he earned his living in this occupation and served this company so ably and so well that he was entrusted with its defense at the end, he continually studied, wrote for publication, and spent a large amount of time and energy in public service. Indeed his chief concern was his researches, his writing, and his public work rather than the occupation by which he earned his living.

Mill supplemented, corrected, and enriched the knowledge obtained from the wide reading of books by personal contact with most of the prominent Englishmen of his time and with many distinguished foreigners. These contacts began in his boyhood at his father’s house, which was frequented by public and scientific men, and were continued throughout his life. He was especially intimate with Jeremy Bentham, the utilitarian philosopher, being for a time a member of his household, and he knew Ricardo well, having frequently met him at his father’s house. He also knew intimately Frederick Maurice, John Sterling, Carlyle, and Austin, the noted writer on jurisprudence. In his young manhood he was a member of debating societies and other clubs frequented by men whose views 011 political, social, and scientific matters were very different from his own, including members of Parliament and other public servants. At different periods of his life he spent considerable time in France, and he was a close and discriminating student of French literature, politics, and society.

The results of his activities along scientific and literary lines were distinguished in the fields of philosophy, political science, and economics. They were given to the public chiefly in the form of books and articles in periodicals. For a short time he was a member of Parliament, and he occasionally made public addresses. His principal writings published in book form were the following:

In 1831, Essays on Unsettled Questions in Political Economy (not published till 1844); 1842, System of Logic; 1848, Principles of Political Economy with Some of Their Applications to Social Philosophy; 1859, Liberty and Thoughts on Parliamentary Reform; 1861, Representative Government; 1863, Utilitarianism; 1864, Comte and Positivism; 1865, Examination of Sir Wm. Hamilton’s Philosophy; and 1869, Subjection of Women. After his death in 1873 there were published from manuscripts he left three more works: the Autobiography in 1873; Three Essays on Religion in 1874, and Chapters on Socialism in 1879.

A selection of his most important magazine articles, published under the title Dissertations and Discussions, fill five good-sized volumes. Those which still remain buried in the files of the Westminster Review, the London and Westminster, the Edinburgh, the Quarterly, the Monthly Repository, Tait’s Magazine, the Traveller, the Chronicle, the Examiner, and other newspapers and periodicals would fill as many more.

Few writers on political economy have had so comprehensive a knowledge of cognate fields of thought or more intimate contacts with the political, social, and economic life of their times, and few have been better endowed intellectually or have approached the subject with greater objectiveness or a stronger desire to find and reveal the truth.

Mill’s training in economics began at an early age when at his father’s fireside he used to listen to discussions between Ricardo and others and when in his daily walks with his father those discussions, and the writings of Adam Smith, Ricardo, and the other economists, were reviewed and the boy was required to answer penetrating questions concerning them. James Mill’s Political Economy was worked out in the course of these discussions between father and son, and the bulk of the work involved in its writing and publication done by the boy. He thus absorbed the theories of Ricardo and the ideas of Adam Smith, Malthus, and others at an age when most children are in the nursery, and they formed the background of his thinking on political, social, and economic matters at the very beginning of his career. Later new light came to him from many sources, including his own researches and incisive thinking, and modified many of his earlier views. His matured thought on the subject was presented in nearly complete form in his book on political economy, later publications indicating some, but with possibly one exception, non-essential modifications.

B. Organization of the Subject-Matter of Mill’s “Principles”

Some indication of the change in the science of economics in the period between Adam Smith and Mill is revealed by a comparison of the chief subdivisions of their respective treatises. In both there were five. Those of The Wealth of Nations were: (1) “Of the Causes of Improvement in the Productive Powers of Labor, and of the Order According to Which Its Produce Is Naturally Distributed among the Different Ranks of the People”; (2) “Of the Nature, Accumulation, and Employment of Stock”; (3) “Of the Different Progress of Opulence in Different Nations”; (4) “Of Systems of Political Economy”; and (5) “Of the Revenue of the Sovereign or Commonwealth.” Those of Mill’s Principles were: (1) “Production,” (2) “Distribution,” (3) “Exchange,” (4) “Influence of the Progress of Society on Production and Distribution,” and (5) “On the Influence of Government.” The greater prominence of the subject of distribution in Mill’s treatise and the emergence of production and exchange and the effect of the progress of society on production and distribution as main subdivisions are obvious. A comparison of the topics treated under each of these main subdivisions would indicate even more clearly the emergence of new subjects of interest and changes in emphasis and points of view.

For few if any of these changes was Mill himself responsible. Production, distribution, interchange, and consumption were the subdivisions employed by his father in the book in the production of which John Stuart collaborated, and Say had divided his Traité into three books entitled respectively “De la production des richesses,” “De la distribution des richesses,” and “De la consommation des richesses.” Turgot entitled his book Reflexions sur la formation et la distribution des richesses. With the exception of advancing to the dignity of a main subdivision the topic of the effect of progress on the production and the distribution of wealth, Mill thus followed the arrangement of subject-matter which had become traditional, but this exception is characteristic and indicates the importance he assigned to the dynamic aspects of the subject and to the application of its principles to what he called social philosophy.

The range of topics included under the five main subdivisions of his book was much wider than that of any previous writer and much more completely covered the various aspects of the subject. His grasp of the field was comprehensive, and his analysis of it logical and complete. He discovered and filled in many gaps which the loose and faulty analysis of his predecessors had not disclosed, or, if disclosed, had neglected. From the points of view of comprehensiveness, completeness, and excellence of organization of contents Mill’s book far surpassed those of the other masters of the science from Adam Smith on. His framework was large enough to include all that his predecessors had done and such additions as he was prepared to make.

C. Production

Under this head Mill discussed three main topics: “the requisites of production”—natural agents, labor, and capital; “the degree of productiveness of the productive agents”; and the “laws” of the increase of labor, capital and “production from land.”

He devoted a chapter to a description of the various ways in which labor operates in production, classifying them under the heads: “Labour employed either directly about the things produced, or in operations preparatory to its production”; “Labour employed in producing subsistence for subsequent labour,” in producing materials and implements; “in the protection of labour”; “in the transport and distribution of the produce”; “labour which relates to human beings”; and “labour of invention and discovery.” The traditional and popular classification of productive operations into agricultural, manufacturing, and commercial he considered unscientific and of little service in economic analysis. “It fulfills,” he said, “very badly the purposes of a classification” partly because “many great branches of productive industry find no place in it, or not without much straining” and partly because “the limit between agricultural and manufacturing industry cannot be precisely drawn.”

The classification of natural agents into those that are practically unlimited and those that are limited in amount he considered of primary importance.

While all the wealth of a country devoted to production is capital, according to Mill, the converse statement that all the capital of a country is devoted to production needs limitation and explanation, because accumulated wealth devoted to production may be temporarily unemployed; or more may be used in a productive enterprise than is strictly necessary, as, for example, when a farmer pays rent for two or three quarters before he gets any returns, or more is paid to laborers than is “strictly and indispensably necessary for production.”

He laid down four propositions concerning capital which he regarded as fundamental, namely, “that industry is limited by capital”; that “it is the result of saving”; that “it is nevertheless consumed”; and that “demand for commodities is not a demand for labour.” By way of explanation, the first proposition is stated in other forms, as, for example, that “there can be no more industry than is supplied with materials to work up and food to eat”; “of what has been produced, a part only is allotted to the support of productive labour; and there will and cannot be more of that labour than the portion so allotted (which is the capital of the country) can feed, and provide with the materials and instruments of production.”

In the second and third propositions, which at first glance appear to be contradictory, Mill wished to emphasize on the one hand the fact that capital is the result of spending on “personal indulgences” less than one produces or receives in the form of income from others and on the other that such savings constitute capital only when they are employed or consumed in the production of other goods. As he uses the term, saving does not necessarily imply privation. It is even consistent with ample and increasing consumption. It does imply abstinence in the sense of refraining from expenditure upon immediate indulgence and the use of income in production either by oneself or by others.

Mill’s analysis of the influences which affect the productiveness of the productive agents is much more complete and his discussion of them much more comprehensive than is the case in the works of his predecessors. He classifies them under the heads “natural advantages”; “the energy, skill and knowledge of labour”; the degree of “intelligence and trustworthiness” and the degree of security “in the community generally”; the “cooperation, or the combination of labour”; and the scale, large or small, on which production is carried on.

Under the head “cooperation, or the combination of labour,” he included division of labor as a subtopic. In the treatment of the other aspects of this subject he quoted extensively from Edward G. Wakefield’s comments, in his edition of The Wealth of Nations, on Adam Smith’s discussion. Wakefield distinguished between “simple” and “complex” cooperation, the former exemplified by two or more men helping each other at the same job and the latter by the separation of employments and the exchange of surpluses. These forms of cooperation, especially the latter, preceded in order of time the “breaking down more and more of every process of industry into parts, so that each labourer shall confine himself to an ever smaller number of simple operations,” which is ordinarily termed division of labor, and are shown to be essential to the advance of civilization beyond the “first rudiments.” In expounding their advantages Mill pointed out the interdependence of city and country and the importance of towns and town occupations in the development of the agriculture of a country and in the growth of the prosperity and happiness of the rural population.

In his chapter entitled “Of Production on a Large, and Production on a Small Scale” Mill pointed out the economies of large-scale production in manufacturing, quoting extensively from Babbage’s Economy of Machinery and Manufactures, the standard work on that subject in his day; discussed the advantages and disadvantages of the “joint-stock principle”; and devoted several pages to a consideration of the advantages, from the point of view of production, of small-scale over large-scale operations in agriculture. On this latter topic he reviewed the arguments pro and con, concluding, however, that the balance is strongly in favor of the small farm cultivated by the proprietor and his family.

The last major topic treated by Mill under the head “production,” is “the law of the increase of production, viewed in respect of its dependence, first on Labour, secondly on Capital, and lastly on Land,” or, as he described it in another place, “the law of this increase in production; the conditions to which it is subject; whether it has practically any limits, and what those are.”

“The fund from which saving can be made, is the surplus of the produce of labour, after supplying the necessaries of life to all concerned in the production: (including those employed in replacing the materials, and keeping the fixed capital in repair).” This he called “the real net produce of the country, . . . the fund from which the enjoyments as distinguished from the necessaries of the producers, are provided, . . . from which all are subsisted, who are not themselves engaged in production; and from which all additions are made to capital.”

Mill was impressed by the differences in this “effective desire for accumulation” in different persons and different communities and by its importance in the determination of the “state of general civilization.” It is generally weak in primitive peoples, like the North American Indians, he thought, and tends to grow stronger with advancing civilization. He thought it had reached an intermediate degree of strength in China and was highest in the most prosperous countries of Europe.

In the history of countries like England he thought the growth of numbers had at times outstripped the progress of improvement and vice versa. When the former condition obtains, the only expedients are importation of food from abroad and emigration, but in the long run, if general deterioration is to be prevented, population must be kept within the limits set by the progress of improvement.

D. Distribution

Among the rules and regulations established by society, the consequences of which in the distribution of wealth are most important, the institution of private property ranks very high, perhaps at the top of the list. Most of the plans looking toward a radical modification of present methods of distribution are based upon a criticism of this institution and involve its abolition or radical modification. Mill, therefore, devoted two chapters to the consideration of it and of communistic and socialistic schemes.

To this end—the improvement of the present system of private property—Mill examined the rights of bequest and inheritance, generally associated with it, and property in land. He advocated the limitation of inheritance to direct heirs and even the amount allowed them, and, while he held that the right of bequest is an essential feature of the right of private property, he believed in such limitation or regulation of its exercise as would prevent its “conflict with the permanent interests of the human race,” as for example, its use in the form of the law of primogeniture or in that of prescribing the details of the use in perpetuity of property left for public purposes.

“If wages were previously so high that they could bear reduction, to which the obstacle was a high standard of comfort habitual among the labourers, a rise of the price of food, or any other disadvantageous change in their circumstances, may operate in two ways; it may correct itself by a rise of wages, brought about through a gradual effect on the prudential check to population; or it may permanently lower the standard of living of the class, in case their previous habits in respect of population prove stronger than their previous habits in respect of comfort. In that case the injury done to them will be permanent, and their deteriorated condition will become a new minimum, tending to perpetuate itself as the more ample minimum did before. It is to be feared that of the two modes in which the cause may operate, the last is the most frequent, or at all events sufficiently so, to render all propositions ascribing a self-repairing quality to the calamities which befall the labouring classes, practically of no validity.”

In case of a fall in the price of food or of any other event that would increase the per capita consumption of the laboring class, Mill believed that the effect would be likely to be a rise in their standard of life instead of an increase in their numbers only in case “an effective national education of the children of the labouring class” be accompanied by “a system of measures which shall (as the Revolution did in France) extinguish extreme poverty for one whole generation.”

In a chapter devoted to the explanation “of the differences of wages in different employments” Mill incorporated and considerably supplemented Adam Smith’s treatment of this subject.

The most noteworthy features of Mill’s discussion of profits in Book II are his analysis of gross profits and his explanation of the differences in the rate of profits in different industries and different places. In gross profits he saw three elements, remuneration for “abstinence, indemnity for risks and remuneration for the labour and skill required for superintendence.”

Differences in risks and in the remuneration for superintendence, “the circumstances which render one employment more attractive, or more repulsive than another,” and monopoly explain, according to his analysis, the differences in the rates of profits in different industries and different places. Regarding remuneration for superintendence or entrepreneur’s wage, he said: “though . . . it does not vary much from employment to employment” [it] “varies very greatly from individual to individual, and can scarcely be in any two cases the same. It depends on the knowledge, talents, economy, and energy of the capitalist himself, or of the agents whom he employs; on the accidents of personal connections; and even on chance.”

Assuming then that “profit arises . . . from the productive power of labour” and that in the final analysis, “leaving rent out of the question,” all the capitalist’s advances “consist of wages of labour,” Mill arrived at Ricardo’s conclusion, “that the rate of profits depends on wages; rising as wages fall, and falling as wages rise,” meaning, however, by wages of labor “the cost of labor,” the cost to the capitalist rather than “what labour brings in to the labourer” being the significant thing in this connection.

E. Exchange

In this book Mill treated the topics of value, money and credit, international trade, and the rate of interest. For the most part he expounded the views of his predecessors, especially Ricardo, on these subjects, making, however, some contributions of his own.

For the purpose of explaining their value he classified goods into three groups according as their supply is “absolutely limited in quantity,” “susceptible of indefinite multiplication without increase of cost,” or “susceptible of indefinite multiplication but not without increase of cost.” The value of goods of the first class, he said, is determined solely by demand and supply; that of the second class, by demand and supply and cost of production, the latter determining their normal or natural or “long-run” value and the former their market value or their fluctuation about the normal or natural or long-run level; and the third class by demand and supply and the cost of their production “in the most unfavorable existing circumstances.”

In explaining cost of production he followed Ricardo closely except at one point, namely in placing greater emphasis upon expenses from the entrepreneur’s point of view, that is, wages plus profits, taxes, etc. He held, however, that quantity of labor is an important factor in the determination of the ratios in which commodities exchange for each other, but, when his exceptions to this principle are taken into consideration as well as his exposition of the principle itself, it is seen that he really held that these ratios are determined by the expenses necessarily incurred by entrepreneurs in production.

In the chapters on money and credit he expounded the best thought of his time on these topics, adding little or nothing to the theory of the subject but much to the clarity and completeness of its exposition. He followed these with discussions of overproduction, international trade, and the effect of exchange on distribution, in which his own contributions were greater.

In a chapter entitled “Of Excess of Supply” he combated a theory which had been defended by Malthus, Dr. Chalmers, and Sismondi to the effect that a general overproduction or oversupply of commodities is possible and, indeed, of not infrequent occurrence. Admitting that overproduction of one or more commodities is possible and common, he denied the possibility of the overproduction of all commodities on the ground, first, that the wants or desires of people for material things have never been and are not likely soon to be completely satisfied, and second, that there can never be a lack of purchasing power, since in the last analysis purchasing power is supplied by commodities themselves, goods being exchanged for and furnishing the means of purchasing each other.

In subsequent chapters covering various aspects of the subjects of money, credit, banking, and the use of money in international trade Mill was at pains to show that the intervention of money and credit in international trade does not change or modify the operation of this principle of “the Equation of International Demand,” as he called it.

In the chapters entitled “Of Money as an Imported Commodity,” “Of the Foreign Exchanges,” “Of the Distribution of the Precious Metals through the Commercial World,” “Influence of the Currency on Exchanges and on Foreign Trade,” and “Of the Regulation of a Convertible Paper Currency” he ably discussed the views of his predecessors and contemporaries on these subjects, making emendations and additions at many points, and achieving a clearer and more comprehensive treatment than any previously published.

He added chapters on “The Rate of Interest,” “Competition of Different Countries in the Same Market,” and “Distribution as Effected by Exchange.” Under the first head he treated the rate of interest on loans, loosely and not very successfully connecting it with what he wrote in the preceding book on the rate of profits.

In the chapter on distribution as affected by exchange he defended the proposition that exchange and money make no difference in the laws of wages, rent, and profits. They constitute the mechanism through which these laws operate but in no way change or modify the laws themselves.

F. Influence of the Progress of Society on Production and Distribution

In this book the dynamic, as distinguished from the static, aspects of economics are discussed; that is, the nature and consequences of the changes which normally accompany advances in civilization. Among these Mill mentioned the “growth of man’s power over nature,” brought about by increasing “knowledge of the properties and laws of physical objects” accompanied by “the skill requisite for executing the most delicate processes of the application of science to practical uses”; “a continual increase of the security of person and property”; and “an improvement in the business capacities of the general mass of mankind” in the form chiefly of a growing “capacity for cooperation.” Mill declared this capacity to be “the peculiar characteristic . . . of civilized beings” and gave as an example of its exercise the formation of joint-stock companies and of associations of working people for production and buying.

In tracing the “influence of the progress of industry and population on rents, profits and wages,” Mill closely followed Ricardo, his discussion, however, being more detailed and differing slightly from Ricardo’s at certain points. Declaring that “the characteristic features of what is commonly meant by industrial progress resolve themselves mainly into three—increase of capital, increase of population, and improvements in production,” he considered first the effect of each of these operating separately, assuming the others to remain stationary; second, the effect of the first two operating at the same time; and third, the effect of all three operating together.

“The increase of population will have diminished the reward of labour, and if its cost is diminished as greatly as its real remuneration, profits will be increased by the full amount. If, however, the increase of population leads to an increased production of food, which cannot be supplied but at an enhanced cost of production, the cost of labour will not be so much diminished as the real reward of it, and profits, therefore, will not be so much raised. It is even possible that they might not be raised at all. The labourers may previously have been so well provided for, that the whole of what they now lose may be struck off from their other indulgences, and they may not, either by necessity or choice, undergo any reduction in the quantity or quality of their food. To produce the food for the increased number may be attended with such an increase of expense, that wages, though reduced in quantity, may represent as great a cost, may be the product of as much labour, as before, and the capitalist may not be at all benefited. On this supposition the loss to the labourer is partly absorbed in the additional labour required for producing the last installment of agricultural produce, and the remainder is gained by the landlord, the only sharer who always benefits by an increase of population.”

Assuming an increase in the amount of capital, population and improvements remaining stationary, the effects, according to Mill, would be as follows: a rise in wages due to an increased demand for labor, the supply remaining stationary; a fall in profits due to the increased cost of production; no change or a rise in rents according as laborers use their increase in wages for the purpose of enlarging their consumption of non-food products only or partly in an increase of their consumption of food products.

Assuming both population and capital increasing, improvements remaining stationary, the effects would vary according as one is increasing faster than the other or both are increasing with equal rapidity. On the former assumption, “the case is so far assimilated with one or the other preceding”; but on the latter, the effects, according to Mill’s reasoning, would be a fall in the margin of cultivation, a rise in the price of agricultural produce, a rise of rents, and a fall in profits. Real wages would remain stationary, the demand and the supply of labor having increased in the same proportion.

It was Mill’s opinion that the power of the forces represented by the increase of population and capital is inherently greater than that represented by improvements, and consequently that the second of the above-mentioned results is the normal and natural one, the first appearing sporadically and occasionally.

The conviction that profits tend to fall in countries progressing in civilization and especially in that phase of it represented by increasing wealth and continual advance in industry and commerce, led Mill to reflect upon the consequences of this tendency.

The minimum rate necessary to induce accumulations sufficient to add to the sum total of capital in existence depends, according to his view, upon the strength of the effective desire of accumulation and the degree of risk involved in the productive employment of capital. As he showed in an earlier section, these vary from time to time and place to place and have a tendency, the former to increase and the latter to decrease, as civilization advances.

According to Mill, four influences operate to prevent a country (like England, for example) which is “within a hand’s breadth of the minimum,” from actually reaching it. These are “overtrading and rash speculation” and “the commercial revulsions” by which they “are always followed”; “improvements in production”; “the acquisition of any new power of obtaining cheap commodities from foreign countries”; and “the perpetual overflow of capital into colonies or foreign countries, to seek higher profits than can be obtained at home.”

As indicated in an earlier paragraph, “improvements in production” enlarge the field for the investment of capital without causing a fall in the rate of profits; importations of food delay or retard the fall in the margin of cultivation and thus prevent the cost of labor from increasing and the rate of profits from falling as much as would otherwise be the case; and the outflow of capital to foreign fields of investment diminishes the amount that would otherwise be invested at home.

On account of the tendency of profits to a minimum and the rapidity with which temporary decreases in the volume of capital from crises and other causes that do not weaken the effective desire for accumulation or increase the risks involved in the productive employment of capital, are made good, Mill was not so much concerned as some of his predecessors and contemporaries had been over governmental expenditures, emigration, and other phenomena which may temporarily make inroads on the capital of the country. He also thought that, for the same reason, the effect upon the laboring class of the conversion of large amounts of circulating into fixed capital in the form of machinery had been misinterpreted. Any temporary diminution in the amount of the wages fund due to this cause would, he thought, be almost immediately made good by new accumulations, and the increased productivity of labor caused by the machinery would enlarge the funds from which savings could be made in the future and ultimately enlarge the funds devoted to the support of labor.

The thing most to be desired in old countries far advanced in civilization, like England, he thought, is better distribution rather than greater production of wealth. To this end “a conscientious or prudential restraint on population” he considered to be “indispensable, to prevent the increase of numbers from outstripping the increase of capital, and the condition of the classes who are at the bottom of society from being deteriorated.” He also advocated “a system of legislation favouring equality of fortunes, so far as is consistent with the just claim of the individual to the fruits, whether great or small, of his or her own industry.”

G. The Influence of Government

The characteristic features of Mill’s treatment of this topic are his classification and discussion of the functions of government and the exceptions he made to the laissez-faire principle.

He distinguished between what he called necessary and optional functions of government, meaning by the former those “which are inseparable from the idea of a government, or are exercised habitually and without objection by all governments,” and by the latter, “those respecting which it has been considered questionable whether governments should exercise them or not.” Under “necessary functions” he specified protection against force and fraud, the passing of laws defining the rights of property and the regulation of inheritance, the enforcement of contracts, the settlement of disputes and the care of dependents. The consideration of the manner in which the exercise of these necessary functions affects economic affairs led him into a well-organized and fairly comprehensive discussion of taxation, public debts, the effects of imperfect security of person and property, imper-fect systems of laws and administration of justice, laws of inheritance, partnership, stock companies, and insolvency.

He introduced his discussion of the optional functions of government with a chapter on “Interference of Government Grounded on Erroneous Theories,” in which he analyzed and stated his objections to the doctrine of protection, usury laws, regulation of prices, monopolies, laws against combinations of workmen, and restraints on opinion and on its publication. He followed this with a chapter on ‘‘The Grounds and Limits of the Laissez-faire or Non-Interference Principle.”

“Whatever theory we adopt respecting the foundation of the social union, and under whatever political institutions we live, there is a circle around every individual human being, which no government, be it that of one, of a few, or of the many, ought to be permitted to overstep; there is a part of the life of every person who has come to years of discretion, within which the individuality of that person ought to reign uncontrolled either by any other individual or by the public collectively.”

“I apprehend that it [this circle sacred to the individual] ought to include all that part which concerns only the life, whether inward or out-ward, of the individual, and does not affect the interest of others, or affects them only through the moral influence of example.”

“Even in those portions of conduct which do affect the interest of others, the onus of making out a case always lies on defenders of legal prohibition.”

“Scarcely any degree of utility, short of absolute necessity, will justify a prohibiting regulation, unless it can also be made to recommend itself to the general conscience; unless persons of ordinary good intentions either believe already, or can be induced to believe, that the thing prohibited is a thing which they ought not to wish to do.”

Following these rules Mill argued in favor of government interference in the following cases:

(2) Persons exercising power over others. Government should intervene for the protection of children and other young persons and the lower animals.

(4) Delegated management. Under this head Mill compared government management of enterprises with that of joint-stock companies, and concluded that both are admissible, the former in cases of monopoly particularly, the latter—under government control—in most other cases.

(5) To give effect to the wishes of persons interested, as for example the regulation of the hours of labor and the disposal of colonial lands.

(6) Care of the poor.

(8) In default of private agency. Things in the general interest which on principle private agencies should care for and which it is their interest to care for, should be undertaken by government if these private agencies default.

Footnotes

1 So many editions and reprints of Mill’s Principles are in use that it has been thought best not to attempt page references. Instead, references are to books, chapters, and subdivisions of chapters. See Book I, Ch. 1, secs, 1 and 2.

2 Book I, Ch. 1, sec. 3.

3 Book I, Ch. III, secs. 1 and 2.

4 Ibid., secs. 3 and 4.

5 Ibid.

6 Book I, Ch. IV, sec. i.

7 Ibid., sec. 3.

8 Ibid., sec. 1.

9 Book I, Ch. V, sec. i.

10 Ibid., sec. 3.

11 Ibid.

12 Ibid., sec. 9.

13 Book I, Ch. XI, sec. 1.

14 Ibid.

15 Ibid.

16 Ibid., sec. 2.

17 Book I, Ch. XI, sec. 3.

18 Book I, Ch. XII, sec. 2.

19 Book I, Ch. XIII, sec. 2.

20 Book II, Ch. I, sec. 1.

21 Ibid.

22 Book II, Ch. II, secs. 1 and 3.

23 Book II, Ch. I, sec. 3.

24 Ibid., sec. 4.

25 Book II, Ch. II, sec. 5.

26 Ibid., sec. 6.

27 Book II, Ch. IV, sec. I.

28 Book II, Ch. XI, sec. I.

29 Ibid., sec. 2.

30 Ibid.

31 Book II, Ch. XV, sec. i.

32 Ibid., sec. 4.

33 Ibid., sec. 5.

34 Book II, Ch. XVI, sec. 5.

35 Book III, Ch. II, sec. 4.

36 Book III, Ch. XVII, sec. 2.

37 Book III, Ch. XVIII, sec. 4.

38 Book III, Ch. XVIII, sec. 2.

39 Book III, Ch. XXV, sec. 1.

40 Ibid.

41 Ibid., sec. 3.

42 Book IV, Ch. II, sec. 2.

43 Ibid., sec. 3.

44 Ibid., sec. 5.

45 Book IV, Ch. III. sec. I.

46 Ibid., sec. 4.

47 Ibid.

48 Ibid.

49 Ibid., sec. 5.

50 Book IV, Ch. III, sec. 5.

51 Book IV, Ch. IV, see. 4.

52 Ibid., secs. 3 and 4.

53 Ibid.

54 Ibid., sec. 5.

55 Book IV, Ch. VI, sec. 2.

56 Ibid.

57 Book V, Ch. XI, sec. 1.

58 Ibid., sec. 2.

59 Ibid., sec. 8.

60 Ibid., sec. 10.

61 Ibid., sec. 14.

• 1Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 2Professor Schmoller found the key to the explanation of this aspect of the system in the development of the national economies of the various European states. These succeeded (in order of time) territorial, municipal, tribal, and family economies, each representative of a certain stage in the history of European civilization, and each produced by the struggle of contending forces, a higher and broader organization in each case subordinating to itself lower and narrower ones. “The essence of this system,” he says, “lies not in some doctrine of money, or of the balance of trade; not in tariff barriers, protective duties, or navigation laws, but in something far greater, namely, in the total transformation of society and its organization, as well as of the state and its institutions, in the replacing of a local and territorial economic policy by that of the national state.” More specifically he says, “The whole internal history of the seventeenth and eighteenth centuries, not only in Germany but everywhere else, is summed up in the opposition of the economic policy of the state to that of the town, the district, and the several estates; the whole foreign history is summed up in the opposition to one another of the separate interests of the newly rising states, each of which sought to obtain and retain its place in the circle of European nations, and in that foreign trade which now included America and India. What was at stake was the creation of real political economies as unified organisms, the center of which should be, not merely a state policy reaching out in all directions, but rather the living heart-beat of a united sentiment.”
• 3The industrial organization of the towns was also gradually weakened by conflicts of interest between townsmen themselves and the oppression of the weaker trades by the stronger, and by the growth of domestic industries. Increasing interference of the central government in town affairs was invited by these conditions, and the power of resistance to it was weakened. The growth of a merchant class in London and some of the other large towns also contributed to the same result. The interests of this class extended beyond the boundaries of the town in which they lived and were promoted by the breaking-down of local trade barriers. The power of this class grew rapidly in and after the sixteenth century.
• 4By the seventeenth century a national commercial and industrial organization had developed, the chief organs of which were middlemen who intervened between producers and consumers and between different classes of producers. Among those of chief importance were the wool-staplers, the clothiers, the drapers, and the foreign trading companies. The wool-staplers purchased the farmers’ wool, their most important staple, and sold it to manufacturers or foreign merchants. The clothiers acted as middlemen between the carders, spinners, weavers, and other handicraftsmen engaged in transforming the wool into cloth. They purchased the wool from the staplers, delivered it to the carders and spinners, distributed the yarn among the weavers to be woven into cloth, and then placed the cloth in the hands of the “fuller,” “walker,” or “tucker” to be fulled and cleansed. The spinners, carders, weavers, and fullers were scattered throughout the hamlets and villages as well as the cities of the country, in many, perhaps most cases, doing agricultural work as a main or a side occupation. The drapers purchased the cloth and sold it to consumers or to foreign merchants; some of them were themselves connected with one of the trading companies. Foreign commerce was chiefly carried on by these latter organizations, to each of which a charter had been granted conferring the exclusive right to trade in a specified part of the world. The Eastland Company, for example, had the exclusive right to trade with Scandinavia and the Baltic region; the Russian Company, with Russia; the Merchant Adventurers, with the Netherlands; the Levant Company, with the Mediterranean region; the Guinea or African Company, with Africa; the East India Company, with the countries of Asia; and several other companies with portions of the American field. At the beginning of the seventeenth century France, Spain, and Portugal were the only countries with which trade could be carried on by an Englishman not a member of one of the companies.
• 5The literary remains of Colbert are of the same general character as those of Sully in that they consist of letters, instructions, and memoirs. They differ from Sully’s, however, in the extent to which they reflect mercantile doctrines. Colbert was the chief executor of the mercantile policy of France, and among his letters, instructions, and other papers may be found expositions and defense of nearly every feature of it. Much more completely than the English writers he reflected the doctrines of nationalism and of the entrepreneur relation of the state to industry. To a greater extent than in any other country these doctrines were realized in the practices of France during the reign of Louis XIV, and for this fact Colbert was largely responsible. Louis XIV aspired to be not only absolute sovereign in France but the dictator of Europe, and he fully realized that foreign commerce and command of the world’s supply of the precious metals would assist in the accomplishment of his purposes.
• 6Becher was at one time a court physician and professor of medicine in Mainz, whence he went to Wurzburg, and later to Vienna. At the two latter places, he was connected with the carneræ of the reigning sovereigns. He wrote on natural science as well as Kameralwissenschaft, his chief work in the latter field appearing at Frankfurt in 1668 under the title Politische Discurs von den eigentlichen Ursachen des Auf- und Abnehmens der Städte, Lander und Republiken, in specie, wie ein Land Volkreich und Nahrhaft zu machen und in rechte Societaten civilen zu bringen. In this book he defines a city as eine volkreiche, nahrhafte Gemeine and defends the following fundamental propositions: The more populous a city, the more powerful it is; but in order to be populous, it must be supplied with an abundance of nourishment; the membership of a community consists of (a) those who serve it and are supported by it, for example, government officers, clergy, learned men, physicians, apothecaries, soldiers, etc.; and (b) those who really constitute it, namely, peasants, handicraftsmen, and merchants. These three classes are essential each to the other. In explaining their mutual relations, however, he makes the following argument: “Consumption is the soul of the three classes, the only bond which holds them together and enables them to live by each other. It is on account of consumption that the merchant class is so necessary in a community, however large the peasant class may be. . . . Since the nourishing of a community can only be accomplished through the trading [Verhandlung] and turning into money [Versilberung] of goods . . . everything which hinders these operations hinders and weakens the populousness which results from it.”
• 7Wilhelm Freiherr von Schroder was in the service of Austria as conductor of a factory according to plans outlined by Becher. He wrote several books, the most noteworthy of which was entitled Fürst-liche Schatz und Rentkammer, which was published in 1686. He was a strong advocate of absolute monarchy and admirably set forth the mercantilistic view of the relation of a sovereign to his people, in the following passage: “A Prince is like a housefather. Now a housefather must fertilize and plough his fields if he would reap a harvest therefrom. He must well stock his pond if he would have fish. He must feed his cattle if he would slaughter them, and well fodder his cows if he desires them to give much milk. Thus a Prince must first help his subjects to a good living, if he wishes to take anything from them.”
• 8In the Détail he gives a discussion of the relation between money and wealth in which he says: “As gold and silver are not and never have been wealth in themselves and are valued only in relation to other things necessary to life,—to which things they serve only as a guarantee and a measure of value,—it is a matter of indifference whether we have much or little of them, provided the same results are produced.” That the same results are produced by much or little he attempts to prove by the following: “Thus we learn from the old accounts that in 1250 a laborer in Paris, who to-day earns 40 or 50 sous a day, earned only 4 pennies a day, 12 one-hundredths part of what he earns now. Nevertheless he then lived with as much comfort as now because all things were in proportion. He satisfied his wants with his four pennies as well as one of the same trade now does with his 50 sous. It follows that a man who at that time had a thousand livres of rent was as rich as one who at present has one hundred thousand.”
• 9In other connections he says: “It is very certain that it [money] is not a good in itself and that the quantity of it does nothing for the opulence of a country in general provided there is enough of it to sustain the prices of the goods necessary to life.”
• 10Silver and gold, he says, have as competitors copper, leather, shells, and “a simple piece of paper which costs nothing but nevertheless performs all the functions of money to the amount of millions by passing from hand to hand an infinite number of times.” By way of illustration he refers to the Lyons fair in the following manner: “In a commerce consisting of purchases and sales to the amount of more than eighty millions not a ‘sou marque’ of money is seen. Everything is done by bills of exchange which after passing through an infinite number of hands, finally return to the original drawer.”
• 11In other connections he emphasized the need of an equilibrium between purchases and sales and the importance of proper adjustments of prices, especially of the prices of raw produce and manufactures.
• 12In order to secure these and other needed adjustments, he affirmed that reliance can be placed only on nature. The following words of his taken from Chapter V of the Dissertation present this doctrine clearly:
• 13In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 14In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 15In this book he refers with approval to Boisguillebert’s description of conditions, including his criticisms of the system of taxation. His own studies, he says, have revealed “conditions which correspond perfectly to what was written concerning them by the author of the Detail de la France, who developed and brought to the light of day very naturally the abuses and malpractices which are practiced in the imposition and the levy of the Tailles, the Aides and the Provincial tariffs.” In his memoir to Le Pelletier he also said: “Let his Majesty have the goodness to remember that the grandeur of kings can only be measured by the number of their subjects, that upon that depends all their grandeur, their power and their riches, and that without that they have only vain titles which are burdens to themselves and to everybody else and nothing more.” In his book he stresses the doctrine “that persons of all conditions should contribute to the public expenses in proportion to their revenue and their industry without privilege or exemption; that taxes ought to be easily collected in such a manner as not to give rise to contests or to vexations on the part of the fiscal agents; and that so far as possible the contributor should be able to pay all his taxes at one time.” The reform he proposed was the levy of what he called a dîme royale or royal tithe, which in substance was a tax to be derived from four different sources:
• 16The author, Richard Cantillon, was born in Ireland between 1650 and 1690. Soon after the death of Louis XIV he removed to Paris and engaged in the business of banking during the period in which John Law flourished. Being confident of the ultimate failure of the Mississippi scheme, Cantillon speculated on the bear side of the market and made a fortune, but incurred the enmity of Law and was obliged to leave France. He was murdered in London on May 16, 1734, by a discharged man-servant, who set fire to his house and stole some of his papers.
• 17The deviation of the market prices of commodities from “their primary and natural price” Ricardo also described as “accidental and temporary.” The demand and supply of a commodity at the moment may be such as to establish a price for it above or below the point indicated by the labor principle, but in that case the profits of the capital employed in its production will be above or below the average in other industries, and this fact will increase in the one case and decrease in the other the amount of capital employed in this industry, thus causing changes in the supply which will tend to bring the market into accord with the natural price. He concludes his discussion with these words: “In speaking, then, of the exchangeable value of commodities, or the power of purchasing possessed by any one commodity, I mean always that power which it would possess, if not disturbed by any temporary or accidental cause, and which is its natural price.”
• 18The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 19The first is indicated in the statement that “rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.” He thus excludes from this category any payment received by the landlord for capital invested in or on his lands in the form of buildings, drains, hedges, fences, walls, fertilizers, and other improvements, as well as gains resulting from the removal of timber, the digging of coal or other minerals, or the quarrying of stone. Those payments he classified as profits, and said that “this is a distinction of great importance . . . for it is found, that the laws which regulate the progress of rent are widely different from those which regulate the progress of profits, and seldom operate in the same direction.”
• 20The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 21The explanation of rent in this restricted sense he finds in the fact that land is limited in quantity and not uniform in quality. “On the common principles of supply and demand,” he says, “no rent could be paid for such land [fertile land in quantities greatly beyond the needs of the population] for the reason stated why nothing is given for the use of air and water, or for any other of the gifts of nature which exist in boundless quantity.” And further : “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is only, then, because land is not unlimited in quantity and uniform in quality, and because, in the progress of population, land of an inferior quality, or less advantageously situated, is called into cultivation, that rent is ever paid for the use of it. When in the progress of society, land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.”
• 22Even before land of inferior fertility is taken into cultivation, superior lands may bear rent, according to Ricardo, provided the point of diminishing returns in their cultivation has been reached. “It often, and, indeed, commonly happens,” he says, “that before No. 2, 3, 4 or 5, of the inferior lands are cultivated, capital can be employed more productively on those lands which are already in cultivation.” By way of illustration he assumes that equal amounts of capital and labor will produce on land of qualities numbered 1, 2, and 3, 100, 90 and 80 quarters of corn respectively and then adds: “It may perhaps be found, that by doubling the original capital employed on No. 1, though the produce will not be doubled, will not be increased by 100 quarters, it may be increased by eighty-five quarters, and that this quantity exceeds what could be obtained by employing the same capital on land No. 3.”
• 23“In such a case, capital will be preferably employed on the old land, and will create a rent; for rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour.” The reason for the creation of rent in this case is that the only available opportunities for the employment of additional labor and capital under the conditions assumed are either on land No. 3 or at a diminished return on land No. 1; and, since two rates of profits on the same market are impossible under competitive conditions, capital and labor must be content with the diminished returns represented by their lower productivity when added to the amounts already employed in the cultivation of No. 1, and the landlord can command the difference between their present and their former productivity.
• 24“The exchangeable value of all commodities, whether they be manufactured, or the produce of the mines, or the produce of land, is always regulated, not by the less quantity of labour that will suffice for their production under circumstances highly favorable, and exclusively enjoyed by those who have peculiar facilities of production; but by the greater quantity of labour necessarily bestowed on their production by those who have no such facilities; by those who continue to produce them under the most unfavorable circumstances; meaning by the most unfavorable circumstances the most unfavorable under which the quantity of produce required renders it necessary to carry on production.” In the case of production from land, the most unfavorable circumstances are those represented by the last application of capital and labor, namely those applied to the poorest quality of land or at the lowest returns on the superior qualities, and these, according to the proposition just discussed, yield no rent.
• 25In another passage he says: “The reason, then, why raw produce rises in comparative value, is because more labor is employed in the production of the last portion obtained, and not because rent is paid to the landlord. The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is not high because a rent is paid, but a rent is paid because corn is high.”
• 26A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 27A third corollary is that “the rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never a cause of wealth; for wealth often increases most rapidly while rent is either stationary, or even falling. Rent increases most rapidly, as the disposable land decreases in its productive powers” “When, in the progress of society,” he says, “land of the second degree of fertility is taken into cultivation, rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land.
• 28Conversely “it follows from the same principles, that any circumstances in the society which should make it unnecessary to employ the same amount of capital on the land, and which should therefore make the portion last employed more productive, would lower rent.”
• 29Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 30Besides a decreased volume of capital and a smaller or worse fed population, Ricardo mentions “such marked improvements, in agriculture, as shall have the same effect of diminishing the necessity of cultivating the poorer lands, or of expending the same amount of capital in the cultivation of the more fertile portion” as a circumstance that may cause rents to fall. He concludes with the statement “that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect and tends to raise it.”
• 31Ricardo concludes his chapter on rent by noting that the landlord profits in two ways by increasing difficulties in the production of raw produce, namely by securing a larger share of the total produce and by a rise in the price and thus in the purchasing power of each unit of the product. The following are his words : “Since the same cause, the difficulty of production, raises the exchangeable value of raw produce, and raises also the proportion of raw produce paid to the landlord for rent, it is obvious that the landlord is doubly benefited by difficulty of production. First he obtains a greater share, and, secondly, the commodity in which he is paid is of greater value.”
• 32In the discussion of wages Ricardo distinguishes between what he calls the natural and the market price of labor and defines the former as “that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution,” and the latter as “the price which is really paid for it, from the natural operation of the proportion of the supply to the demand.” In this case, as in that of commodities in general, market price tends to conform to natural price and for the same reason, namely that, whenever the market deviates from the natural price, changes in the relation between the demand and the supply of labor take place which tend to bring them into conformity with each other. On this point Ricardo says :
• 33In the discussion of wages Ricardo distinguishes between what he calls the natural and the market price of labor and defines the former as “that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution,” and the latter as “the price which is really paid for it, from the natural operation of the proportion of the supply to the demand.” In this case, as in that of commodities in general, market price tends to conform to natural price and for the same reason, namely that, whenever the market deviates from the natural price, changes in the relation between the demand and the supply of labor take place which tend to bring them into conformity with each other. On this point Ricardo says :
• 34It is important to note that Ricardo thought of natural wages in terms of the necessaries and comforts of life, i.e., of the commodities and services laborers use in the satisfaction of the wants of themselves and their families. “The power of the labourer to support himself and the family which may be necessary to keep up the number of labourers,” he says, “does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit which that money will purchase. The natural price of labour, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labour will fall.”
• 35Ricardo’s thinking at this point is substantially like that of Malthus in his Essay on Population. Both thought that there is a certain quantity of necessaries, comforts, and conceivably luxuries to which laborers become so accustomed by habit that, if they receive less than the amount required to purchase these, they will refuse to raise families large enough to maintain their numbers; and that, if they receive more than this amount, they will raise families so large that their numbers will increase. Both believed that the amount of these necessaries, comforts, and luxuries required to induce laborers to maintain their numbers without either increase or decrease is not fixed and unchangeable, but that it varies from time to time. “It is not to be understood,” says Ricardo, “that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country and very materially differs in different countries.” It seems to have been Ricardo’s opinion that in England at least it was larger in his time than it had been in times past. “Many of the conveniences now enjoyed in an English cottage,” he says, “would have been thought luxuries at an earlier period of our history.”
• 36Ricardo’s thinking at this point is substantially like that of Malthus in his Essay on Population. Both thought that there is a certain quantity of necessaries, comforts, and conceivably luxuries to which laborers become so accustomed by habit that, if they receive less than the amount required to purchase these, they will refuse to raise families large enough to maintain their numbers; and that, if they receive more than this amount, they will raise families so large that their numbers will increase. Both believed that the amount of these necessaries, comforts, and luxuries required to induce laborers to maintain their numbers without either increase or decrease is not fixed and unchangeable, but that it varies from time to time. “It is not to be understood,” says Ricardo, “that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country and very materially differs in different countries.” It seems to have been Ricardo’s opinion that in England at least it was larger in his time than it had been in times past. “Many of the conveniences now enjoyed in an English cottage,” he says, “would have been thought luxuries at an earlier period of our history.”
• 37The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 38The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 39The demand for labor, which, in accordance with the actually existing supply, determines actual or market wages, is, according to Ricardo, determined by the amount of capital or, more accurately perhaps, is in proportion to the amount of capital. “In proportion to the increase of capital,” he says, “will be the increase in the demand for labour; in proportion to the work to be done will be the demand for those who are to do it.” In another passage he says: “Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, etc., necessary to give effect to labour“ (italics mine). Since the amount of capital may for a time increase more rapidly than the numbers of the laboring class, market wages for a considerable period may be above natural wages. “Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people.”
• 40According to Ricardo, the relative rates of increase of capital and population and thus of the demand and supply of labor are different in different “stages of society” and depend chiefly upon the “abundance of fertile land.” He says : “In new settlements, where the arts and knowledge of countries far advanced in refinement are introduced, it is probable that capital has a tendency to increase faster than mankind; and if the deficiency of labourers were not supplied by more populous countries, this tendency would very much raise the price of labour. In proportion as these countries become populous, and land of a worse quality is taken into cultivation, the tendency to an increase of capital diminishes ; for the surplus produce remaining, after satisfying the wants of the existing population, must necessarily be in proportion to the facility of production. Although, then, it is probable that under the most favorable circumstances the power of production is still greater than that of population, it will not long continue so; for the land being limited in quantity, and differing in quality, with every increased portion of capital employed on it, there will be a decreased rate of production, whilst the power of population continues always the same.”
• 41According to Ricardo, the relative rates of increase of capital and population and thus of the demand and supply of labor are different in different “stages of society” and depend chiefly upon the “abundance of fertile land.” He says : “In new settlements, where the arts and knowledge of countries far advanced in refinement are introduced, it is probable that capital has a tendency to increase faster than mankind; and if the deficiency of labourers were not supplied by more populous countries, this tendency would very much raise the price of labour. In proportion as these countries become populous, and land of a worse quality is taken into cultivation, the tendency to an increase of capital diminishes ; for the surplus produce remaining, after satisfying the wants of the existing population, must necessarily be in proportion to the facility of production. Although, then, it is probable that under the most favorable circumstances the power of production is still greater than that of population, it will not long continue so; for the land being limited in quantity, and differing in quality, with every increased portion of capital employed on it, there will be a decreased rate of production, whilst the power of population continues always the same.”
• 42In his discussion of the interaction of the forces which determine market and natural wages, Ricardo makes some statements which indicate his belief that in the natural advance of society laborers will meet with increasing difficulty in maintaining their standard of life. For example, he says :
• 43In a statement following he gives numerical illustrations of his doctrines in which he assumes that the money wages of laborers will be so adjusted that they will be able always to purchase the same quantity of commodities. He expresses the same view in the following words : “In proportion as corn becomes dear, he would receive less corn wages, but his money wages would always increase, whilst his enjoyments, on the above supposition, would be precisely the same. But as other commodities would be raised in proportion as raw produce entered into their composition, he would have more to pay for some of them. Although his tea, sugar, soap, candles and house rent would probably be no dearer, he would pay more for his bacon, cheese, butter, linen, shoes, and cloth; and therefore, even with the above increase of wages, his situation would be comparatively worse” (italics mine).
• 44The pessimistic view of the probable future of the laboring classes suggested in the passages above quoted is placed by Ricardo in contrast with that of the landlord class in the following statements :
• 45Having explained the share in the joint product of land, labor, and capital obtainable by landlords and laborers respectively, Ricardo treats the capitalist as the residual claimant, assigning to him what remains. To Ricardo, therefore, profits are total product minus the sum of the rents and wages paid to the cooperating landlords and laborers. He simplifies the problem still more by directing attention to the no-rent or marginal lands and the no-rent application of capital, thus eliminating rent from the calculation and explaining profits as the product of no-rent lands and no-rent capital minus the wages paid to the coöperating laborers. It follows, therefore, that the greater the share of labor the smaller that of capital. Ricardo says:
• 46Under the same circumstances Ricardo claims that the profits of farmers as well as those of manufacturers would fall in spite of the fact that the rise in the price of corn increases the value of each unit of their product. This is true because, according to his doctrine of value, the rise in the price of each bushel of corn produced on the margin and the number of bushels produced are so related that the total money value of the marginal product remains constant, and, since a larger amount must be paid to laborers in order to enable them to command the same quantity of necessaries, the amount left for the farmers is necessarily smaller. In the following passages Ricardo makes this clear by means of numerical illustrations:
• 47Ricardo puts his doctrine in a nutshell in the statement “that profits depend on high or low wages, wages on the price of necessaries, and the price of necessaries chiefly on the price of food” and concludes that “the natural tendency of profits then is to fall; for, in the progress of society and wealth, the additional quantity of food required is obtained by the sacrifice of more and more labour.”
• 48According to the reasoning outlined in the preceding sections of this chapter, the cost of producing corn on the margin of cultivation is a force of major importance in the distribution of wealth. Changes in it affect the proportions between rent, wages, and profits in such a manner as to indicate a real conflict of interest between landlords on the one hand and laborers and capitalists on the other. When this cost rises, rents increase not only absolutely but proportionally, profits fall, and, while money wages rise, real wages, that is what the money wages will buy, at the best remain stationary and at the worst slightly fall. A fall in costs on the margin causes a fall in rents both absolutely and relatively, a rise in profits, and a fall in money but not in real wages. The interests of landlords seem, therefore, to be opposed to that of the other two classes. Ricardo’s manner of expressing this conflict from the standpoint of laborers was indicated in a quotation at the close of the section on wages. From the standpoint of capitalists it is expressed in the following passage : “The farmer, then, although he pays no part of his landlord’s rent; that being always regulated by the price of produce, and invariably falling on the consumers, has, however, a very decided interest in keeping rent low, or rather in keeping the natural price of produce low. As a consumer of raw produce, and of those things into which raw produce enters as a component part, he will, in common with all other consumers, be interested in keeping the price low. But he is most materially concerned with the high price of corn as it affects wages. With every rise in the price of corn, he will have to pay out of an equal and unvarying sum of £720, an additional sum for wages to the ten men whom he is supposed constantly to employ. We have seen, in treating on wages, that they invariably rise with the rise in the price of raw products.”
• 49A variation from, and offshoot of, the productivity theory of interest has been named the use theory, its exponents distinguishing between the sale of the use of capital and of its substance, and identifying the value of the former with interest. Say’s use of the conception productive services of capital was so loose that it is difficult, and perhaps impossible, to determine whether he intended to distinguish between them and the consumption of the substance of the capital itself, and accordingly Böhm-Bawerk classified him among the use as well as the productivity theorists. The principal exponents of this theory, however, were Germans who differentiated between the uses and the substance of capital. In the case of durable goods the making of this distinction is a simple and easy matter. A horse, for example, may be sold outright or its services may be sold separately, as is the case when a liveryman lets it for hire. The same distinction is made every day in the case of a large number of durable goods. It is not so easy to make the distinction, however, in the case of perishable goods or of those capable only of a single use. What, for example, is the distinction between the use of the pig-iron used in the manufacture of steel and the consumption of the pig iron itself? Hermann attempted to point out this distinction in the following manner:
• 50The final summary of his conclusions is thus expressed : “The economical progress of society constituted of landlords, capitalists, and labourers, tends to the progressive enrichment of the landlord class; while the cost of the labourer’s subsistence tends on the whole to increase, and profits to fall. Agricultural improvements are a counteracting force to the two last effects; but the first, though a case is conceivable in which it would be temporarily checked, is ultimately in a high degree promoted by these improvements; and the increase of population tends to transfer all the benefits derived from agricultural improvements to the landlords alone.”
• 51The first one he noted is described in the following passage : “When a country has long possessed a large production, and a large net income to make savings from, and when, therefore, the means have long existed of making a great annual addition to capital; (the country not having, like America, a large reserve of fertile land still unused), it is one of the characteristics of such a country, that the rate of profit is habitually within, as it were, a hand’s breadth of the minimum, and the country therefore on the very verge of the stationary state.” By the minimum of profits he meant “some particular rate of profit, which is the lowest that will induce the people of that country and time to accumulate savings, and to employ those savings productively”; and by the stationary state, the state of ”a country in which a minimum has been reached and in which consequently, “no further increase of capital can for the present take place.”
• 52The first one he noted is described in the following passage : “When a country has long possessed a large production, and a large net income to make savings from, and when, therefore, the means have long existed of making a great annual addition to capital; (the country not having, like America, a large reserve of fertile land still unused), it is one of the characteristics of such a country, that the rate of profit is habitually within, as it were, a hand’s breadth of the minimum, and the country therefore on the very verge of the stationary state.” By the minimum of profits he meant “some particular rate of profit, which is the lowest that will induce the people of that country and time to accumulate savings, and to employ those savings productively”; and by the stationary state, the state of ”a country in which a minimum has been reached and in which consequently, “no further increase of capital can for the present take place.”
• 53He was convinced that such a minimum of profits is a reality. Some capital would be accumulated, he thought, if there were no profits, but savings under such conditions, he believed, would be used as a provision for bad times and a reserve “for sickness and infirmity” or “as a means of leisure and independence in the latter part of life, or a help to children in the outset of it” and would “have not much tendency to increase the amount of capital permanently in existence.”
• 54“Commercial revulsions” result in the destruction and waste of capital, temporarily diminish its volume, and raise the rate of profit. They occur periodically and have their basis in a characteristic of human nature which Mill suggested in the following passage : “By the time a few years have passed without a crisis, so much additional capital has been accumulated, that it is no longer possible to invest it at the accustomed profit; all public securities rise to a high price, the rate of interest on the best mercantile security falls very low, and the complaint is general among persons in business that no money is to be made. . . . But the diminished scale of all safe gains, inclines persons to give a ready ear to any projects which hold out, though at the risk of loss, the hope of a higher rate of profit; and speculations ensue, which with the subsequent revulsions, destroy, or transfer to foreigners, a considerable amount of capital, produce a temporary rise of interest and profit, make room for fresh accumulations, and the same round is recommenced.”
• 55The “stationary state,” which Mill believed would result from economic progress under the existing order, would be or might be, he thought, more desirable than the present one. “I confess,” he said, “I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other’s heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress. . . . The best state for human nature is that in which, while no one is poor, no one desires to be richer, nor has any reason to fear being thrust back, by the efforts of others to push themselves forward.”
• 56“Under this twofold influence,” he said, “society would exhibit these leading features; a well paid and affluent body of labourers; no enormous fortunes, except what were earned and accumulated during a single life-time; but a much larger body of persons than at present, not only exempt from the coarser toils, but with sufficient leisure, both physical and mental, from mechanical details, to cultivate freely the graces of life, and afford examples of them to the classes less favorably circumstanced for their growth. This condition of society, so greatly preferable to the present, is not only perfectly compatible with the stationary state, but, it would seem, more naturally allied with that state than with any other.”
• 57In this chapter he distinguished between what he called “authoritative” and “unauthoritative” intervention. Authoritative intervention controls “the free agency of individuals” by interdicting persons “from doing certain things; or from doing them without its authorization” or by prescribing “to them certain things to be done, or a certain manner of doing things which is left optional with them to do or to abstain from.” Unauthoritative intervention is limited to “giving advice and promulgating information; or when, leaving individuals free to use their own means of pursuing any object of general interest, the government, not meddling with them, but not trusting the object solely to their care, establishes, side by side with their arrangements, an agency of its own for a like purpose.”
• 58In Mill’s opinion the sphere of authoritative intervention is much more limited than that of unauthoritative, and strong reasons must be found before it can be legitimately entered. As guiding principles he laid down the following rules :
• 59(1) Education. The general rule that the consumer is a competent judge of commodities does not always apply in this case. The very fact that he lacks education may unfit him to judge of its value to him. “Education,” said Mill, “therefore, is one of those things which it is admissible in principle that a government should provide for the people. The case is one to which the reasons of the non-interference principle do not necessarily or universally extend.”
• 60(3) Contracts in perpetuity. “The practical maxim of leaving contracts free, is not applicable without great limitations in case of engagements in perpetuity.”
• 61(7) Colonization, involving consequences to the “interests of the nation or of posterity, for which society in its collective capacity is alone able, and alone bound, to provide.”